COMMENTARY
by Judy Barber

I watch a heated discussion between the parents of teenagers who attend a private high school. Some feel kids should be given a sizable lump sum each month to pay for everything from school lunches to clothes and ski trips. Others worry that if they don't provide separate lunch money, their children will buy junk food instead of a meal to save money.

In an individual session, I listen to a mother's guilt about limiting funds to her child through an allowance. She feels "ungenerous" knowing she can give her daughter so much more. I sit with a couple struggling over whether to make a yearly gift of $22,000 to their 30 year old son, a part-time coffee house waiter who also volunteers many hours to community service. Respecting what he does while lamenting that he is not more ambitious, they wonder if it is right "to raise his lifestyle slightly above the poverty level."

Raising children from affluent families to be money largely financially responsible adults isn't always easy, for parent or child. Some parents feel fraudulent limiting their children's funds when they could give whatever they want. Others believe children need to "earn their way." Children, particularly as they move into adolescence, can feel resentful about being on a budget when they perceive that their parents are not.

These issues are complicated by the habits and beliefs parents bring to educating children about money. Our children learn the meaning of money largely from what they see us do. There are four things we can do to promote a healthy approach to money:

ROLE MODELS Learning about money is more than the mechanics. Kids need to understand, emotionally as well as financially, the limits of what money can buy. They learn both from us. We need to be conscious of our own values and of their source. For many of us, our parents are still inside our heads, guiding us to do what they did, cautioning us if we diverge from their beliefs. Often we are torn between obedience and rebellion to our parents' ways as we go about our money lives.

A forty-two year old woman told me that she was thinking of buying a Porsche, her first sports car. An inheritance from her parents combined with what she earned had given her a cushion that did not interfere with her family obligations. Yet her excitement was mixed with uneasy feelings. I asked her what her parents would say about her impending purchase if they were alive.

"Ah! My parents," she said, "My father would say, 'How foolish. You're a woman. Why would you want a car like that?' My mother would say, 'It's a waste of money and so ostentatious...I'm embarrassed.'" "And you?" I asked. "I've always wanted this car" she said. "And the parents inside my head are just going to have to live with it."

A father of a twelve year old boy says to me, "Hey, he wants this fancy bike with a zillion speeds! So he can buy it himself. That's what I had to do when I was his age". The father tells me about his own experience of growing up in a household with little money and about his resourcefulness in getting what he wanted. I suggested that his own childhood experience was not a good reason for making his son buy his own bike. If he believed his son should pay for the bike then he could tell him, "You need to buy the bike because it's important for you to have the experience of planning, saving, and researching your decision."

Separating our own childhoods from our children's lives and putting ourselves in their shoes keeps us grounded in the present and helps us create a 'safe' environment where there are no taboo topics or 'dumb' questions about money. Bruno Bettelheim, in his book A Good Enough Parent: A Book on Child Rearing, says we can do this by remembering "what a parallel issue meant to us when we were children...and how we would have liked our parents to handle it, us and themselves."

I remember talking with a group of high school students in a neighborhood where many of the parents, employed by companies with large defense contracts, had been laid off. These kids knew of the pressure on their parents, could see the cutbacks. Yet in these anxiety-filled homes no one broached the topic. I explained, "Your parents don't want you to worry; they're protecting you." The collective response was, "But we know what's going on and it would help if they'd talk about it so we'd know if we could help."

Parents sometimes tip-toe around the topic of money to avoid questions they don't want to answer: Queries about income, credit cards, value of a house, net worth, and estate plans. We each have to find our comfort level in deciding which of these deeply personal issues to discuss. But, in deciding, there are some questions we can ask ourselves: Can my son or daughter keep this in confidence? What kind of impact will this information have on his or her own motivation? Could this information be distracting? What are the limits of the information I want to share?

A MATTER-OF-FACT APPROACH TO LEARNING FINANCIAL SKILL Managing money is a skill children learn, like riding a bike. It's a gradual process built on a foundation of experience and safety. Children often begin riding a bike in a driveway or a parking lot and graduate over time to a busy street. So, too, with learning about money. Ideally, the first experiences are limited. With age and expertise, children receive additional money and greater responsibility.

As parents we need to present the case for how important it is to learn about money. With younger children, through age ten or so, the discussion can be simple, "We want you to have money so you can learn how to handle it." There can be some dialogue about the amount of money and what expenses it will cover. As children get older and see the contrast between the family's lifestyle and what they can afford, there needs to be a further explanation," It may look as if we have unlimited money in the family but that's not the reality. There is a ceiling on how much we can spend and we want you to experience those financial limits."

Comments like, "you need to learn the value of money" or "money doesn't grow on trees" are often felt as criticisms to kids struggling with their internal self-judgements about money they've wasted or failed to save. They may not yet have the foresight to plan nor the maturity to absorb their mistakes.

MONEY TO MANAGE An allowance is often the first financial relationship parents have with children. From then on, every pay day is a complex test of parents' and kids' values and the marital relationship. It is my strong belief that an allowance is a useful tool for children to learn how to manage money, not a system of rewards and punishments. The need for children to do regular household chores for the family should be unrelated to their allowance.

For nearly 15 years I've asked clients some basic questions as part of an initial interview, "How did you learn about money?" and "Did you have an allowance and how did it work?" Those who received a consistent amount of money to manage feel, for the most part, more confident about their ability to handle their finances than those who had to ask or whose income shrunk or swelled depending on their behavior. One woman struggling with her own spending habits, and those of her children, described her childhood experience:

"I felt confused and anxious about money. Managing it never occurred to me. All my energy was tied up in figuring out how to get money. I rehearsed my rationalized requests to my mother and chose the best times to ask her. Was there something I needed to do for her before I asked to assure that I'd get the money I needed to go to the movies?"

A regular allowance and a clear definition of what the money is for not only teaches financial skills but it can prevent internal tensions that follow children into their adulthood.

Parents sometimes give allowances to preschoolers before the children know the difference between a nickel, a dime, or a dollar. That can be confusing for a young child. For children up to ages 9 or 10, their allowance buys the smaller treasures but doesn't stop some of them from asking for the larger ticket items. If the items make sense - saving for their own compact disks, sports equipment, hobby supplies, and money for gifts - some parents set aside a certain amount each month, perhaps $25.00, for those bigger items.

That money can be spent each month or saved for something special. Eleven to thirteen year olds may be ready to cover trips to the movies, and clothing. With my daughter, this system cut down on the constant "asks"; by the age of ten, she planned and allocated that money so well that the $25.00 was eventually included in her allowance.

The high school years fly by and many kids go away to college with their first checkbook and not much experience with a budget. The more we can prepare teenagers for the time when they will leave home and manage their own money, the more financially capable they'll be.

THE EXPERIENCE OF THEIR OWN MISTAKES Just as most of us made, and may still make, mistakes with our money, our kids won't always make the best judgments. It is usually a mistake to bail them out. They need to learn from their errors a better understanding of how to handle money. I've seen many parents of adult children agonize over how to stop bailing-out twenty-five or fifty year olds, wishing they had let their children live with the consequences of their financial actions when they were teenagers.

I've also listened to adults who continue to feel financially dependent on their parents. Many don't believe they can make it on their own without the safety net. The fear of failure is great.

So let's seize every opportunity to talk to our kids about money and support them in learning how to handle it. Then let's stand back and, with as little judgment as possible, allow them to take risks, make mistakes, and learn from experience how to confidently manage the money in their lives.

PROFESSIONAL VIEW

Giving to Kids — for Love or Taxes
by Ellen B. Turbow, Attorney

Adults make gifts to children for a variety of reasons, not the least of which are love, affection and generosity. Some gifts are motivated by future planning, usually for college expenses but sometimes to provide for a child's special needs. Others are motivated by tax and estate planning.

Whatever the reason, gifts to minors require special handling because, generally, minors cannot hold property in their own names. This requires that an adult hold it for the children's benefit until they are of age. In addition, children in California magically turn into adults, legally if not emotionally, at the age of eighteen when the law says that they can deal with their property as they wish. And so, vehicles for making gifts to minors have been created which recognize that eighteen-year-olds may not yet have the wisdom of their elders and direct gifts towards, perhaps an institution of higher learning rather than to Tower Records.

Before proceeding, let's slash certain common practices from our discussion. Stashing money in the cookie jar or in your bank account "in trust for junior" doesn't count. As long as you keep control, it's not a gift.

Also, we will assume that you want each of your gifts to qualify for the $10,000 annual gift tax exclusion ($20,000 if you are married). Of course, if you are feeling magnanimous, you can make gifts of up to $600,000 free of the gift tax because of the unified tax credit for lifetime or testamentary transfers. In addition, if you pay a child's tuition expenses directly, the gift will be excluded from gift tax.

AUNT FLORA'S OUTRIGHT GIFT Let's take three examples of generous people whose beneficiaries happen to be minors and try to identify what might be the best way to make gifts. First, there is Aunt Flora. She likes to give $100 to each of her five nieces and nephews every Christmas. Any toy store will be happy to break the $100-bills. If she writes them each a check, however, their parents would probably have to cash it for them. Many banks will allow minors to open savings accounts and even to make withdrawals, but usually not without a parent's consent. Because minors cannot enter into legally binding contracts banks are understandably reluctant to do business with them. Outright gifts to minors are fine as long as they are relatively small and do not require any financial management.

THE JONESES GIVE STOCK Anna and Roger Jones have some stock in a small software company that has developed an exciting new product. They would like to share their good fortune with their grandchildren, Jeremy and Emily and teach them something about the stock market at the same time. Because (except for a Series EE Savings Bond) a security is a negotiable instrument that cannot be held in a minor's name, Anna and Roger will instruct their broker to transfer 100 shares of stock to each of their grandchildren in separate certificates, as follows:

"Alan Jones (their son) as Custodian for the benefit of Jeremy Jones under the California Uniform Transfers to Minors Act," and "Alan Jones, as Custodian for the benefit of Emily Jones under the California Uniform Transfers to Minors Act."

Jeremy, who is sixteen and very fond of motorcycles, has already expressed jubilation at the thought of converting the stock into cash when he turns eighteen. Before then, his father, as Custodian, has complete control. Fortunately, by adding the words "until age twenty-one" to the title on the stock certificate, Anna and Roger can give Alan another three years to educate their grandson about the joys of saving and the dangers of motorcycles. Also, by designating an alternate Custodian, they can avoid Court proceedings if Alan should die before the grandchildren are twenty-one.

If Alan himself wants to make a gift of cash, stock or real estate to his children under the Uniform Transfers to Minors Act ("UTMA"), he should name a relative or friend as Custodian rather than himself to avoid the gift's being brought back into his estate for estate tax purposes if he should die before the gift is distributed to his children.

THE GARCIAS TRUST TRUSTS Connie and Eric Garcia, a two-income professional couple with two young children, are painfully aware of the escalating costs of a college education. They want to start a college fund now, especially since their parents want to contribute to their grandchildren's education. Connie and Eric go to a lawyer and describe their objectives: (1) to start a fund that will grow over the years to provide for their children's college education; (2) to retain control over the investments; (3) to have discretion over the distributions; (4) to avoid distributions in excess of college expenses until the children are thirty years old; and (5) to qualify for the annual gift tax exclusion.

Their lawyer explains that what they need is an irrevocable trust to hold the gifts, and that there are several types from which to choose. Two types of minor's trusts automatically qualify for the gift tax exclusion. However, because of the restrictions and requirements of these trusts, most people find that they are not much more advantageous than a UTMA gift, which also qualifies for gift tax exclusion.

On the other hand, despite its unfortunate name, a "Crummey Trust" provides the flexibility and tax advantages that donors are looking for when they make sizable or continuing annual gifts. The trust derives its name from a U.S. Tax Court case in which parents, named Crummey, wanted to make gifts in trust to their children, but they wanted the gifts to be distributed well after the children had turned twenty-one. At that time, such a trust would not qualify for gift tax exclusion.

The Crummey's lawyer designed a 'right of withdrawal' for minors that qualified the trust for the gift tax exclusion and the Crummey Trust was born.

The Garcia's lawyer recommends that Eric serve as the Family Trustee to direct the trust investments, that a friend or relative serve an the Independent Trustee with authority over the distributions (to avoid the trust's being included in Eric's estate if he should die before the trust terminates), and that Connie serve as the children's guardian for notice of the withdrawal rights. The trust can terminate when the children turn thirty or at whatever age the Garcias specify. Moreover, distribution of trust income can be planned to take advantage of the lowest income tax brackets.

AVOIDING THE TAX BITE And speaking of taxes, in the good old days, even parents who were not crazy about their kids were crazy about saving taxes. Children were usually in a lower income tax bracket than their parents, and so gifts to minors produced a less painful overall family tax bite. However, Congress, always in need of cash, decided that gifts to children should be motivated by love of children and not love of tax savings and passed the "kiddie tax." Under the current tax law, unearned income of children under the age of fourteen (in excess of $1200) is taxed at their parents' highest marginal income tax rate. Also, if parents are trustees of a trust for their children and use the trust income to fulfill their legal obligation of support, the parents will be taxed on the income.

More recently, Congress granted trusts the dubious privilege of paying higher income taxes by compressing their tax brackets, with the result that, where individuals must have income of $250,000 before they pay tax at the highest bracket (39.6), trusts find themselves in the highest bracket at $7,500. Fortunately, income from a minor's trust can be accumulated in the trust distributed to the beneficiary (or a custodial account under the UTMA) to produce the lowest tax.

Another tax consequence to keep in mind when making gifts of appreciated assets like stock or real estate is that the donor receives a carry-over basis (the donor's basis) for determining capital gain on future sale. One way to avoid paying capital gains tax, fund a child's education, and benefit a charity at the same time is by establishing a charitable remainder education trust, which gives you an income tax deduction to boot.

Another tax that makes grandparents even grayer is the generation-skipping transfer tax which, at 55, qualifies as one of the highest transfer taxes. As its name implies, it applies, in its simplest form, to gifts from grandparents to grandchildren. Fortunately, each individual has a $1 million exemption from this tax, and annual exclusion gifts, either using the UTMA or a qualifying grandchild's trust, will also be excluded from the tax.

GUARDING AGAINST GUARDIANSHIPS The least desirable way to make gifts to minors is by a legal guardianship: that is, a guardianship of the minor's estate authorized by Court order and requiring continuing Court supervision and annual accountings. To avoid creating one - by naming a minor as beneficiary of a life insurance policy or retirement plan, or simply as beneficiary of your estate, for example- I advise creating a trust in your Will for the minor's benefit and designating it as beneficiary of the policy or plan.

In summary, outright or custodial gifts under the UTMA are the simplest and least costly way to transfer property to minors. However, for substantial and continuing gifts, trusts provide the greatest flexibility, control and assurance that the gifts you make will be used as intended.

Ellen B. Turbow is a former member of the Palo Alto, California law firm of Blase, Valentine and Klein. She is now retired.